Partial Nationalization Goes Ahead

To follow up my earlier comments: today’s discussions at the Treasury Department in DC involved the heads of most of the major US banks. The New York Times story is here: Treasury Outlines Investments in Banks

Curiously Wells Fargo, the purchaser of Wachovia is not listed as an attendee. This is odd given the huge size that Wells will have after the merger is completed.

The plan is to inject taxpayer money directly into the banks in order to shore up their capital positions. This is a recognition that the crisis is not simply one of liquidity but also one of solvency.

The banks ‘benefitting’ from taxpayer largesse are: Bank of America; Citigroup; JPMorgan Chase and Wells Fargo each of whom will receive $25 billion; Goldman Sachs and Morgan Stanley, each of whom gets $10 billion; and Bank of New York and State Street both of whom will get between $2 and $3 billion.

The government is also going to guarantee senior debt issued by these banks over the next three years; and will provide unlimited deposit insurance to all non-interest-bearing accounts [these are mainly business accounts].

Overall this is dramatic stuff. The government will receive preferred stock in return for its money which means it will earn interest. Plus it will limit executive compensation in those banks.

This is an unprecedented intrusion by government into the financial system. The US has nationalized banks before, but generally only when they are bankrupt. In those earlier cases the intention was to liquidate the insolvent banks and recoup the government’s money via subsequent asset sales. This time the taxpayers are investing in going concerns. That’s a huge difference, and is in direct contradiction of traditional American capitalism.

We are now firmly in the European system.

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